Tracking Business Expenses for Taxes 2021
You can use a variety of methods to track business expenses, but to properly manage your business, track expenses, and make sure expenses are accurately accounted for, you will need to create a cost tracking system that works for you. In this below article let’s talk about tracking business expenses for taxes.
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What are the Business Expenses?
Proper tracking of business expenses is part of the accounting process. Any expense associated with your business is considered a business expense.
Here are some common business expenses you may encounter:
- Bank charges
- Consultation fees
- Contract work
- Duties and donations
- Office supplies
- Shipping and delivery costs
- Print and copy
- Trips abroad for work
Print this out or pin it on Pinterest to use at tax time.
While these are the most common categories of business expenses, any purchase related to your business can be classified as a legitimate business expense.
Why is business expense tracking so important?
When preparing your tax return each year, specifically for Form 1040, the IRS asks you to list the amount and type of taxable income you have earned in the last year. When you get certain types of income, the IRS will ask you to complete an additional form to describe that particular type of income. Did you get any rental income in 2017? You probably had to submit an additional form called Schedule E to describe your rental income and expenses. The reason the IRS asks for all of the above information is because you only have to pay taxes on your business profits. Your business profits are your business income minus your business expenses.
By keeping track of business expenses throughout the year, you are basically contributing your taxable income to reduce the amount taxed. That’s why it’s so important to keep track of your spending throughout the year – every time you include a business expense in your records, you’re putting money in your own pocket!
How to Track Your Small Business Expenses
The best way to track your business expenses is to use small business accounting software, which makes it much easier to track your expenses, correctly classify, and access financial information to update. This is especially important at tax time, as you want to make sure you get as many cost deductions as you can. There are ways to track costs manually, although this is only recommended if you have few business expenses to track.
1. Open a business bank account
As a new business owner, you will need to open a business bank account. When operating such an account, it should be used exclusively for business transactions.
2. Choose a suitable accounting system
You have the option of choosing what type of accounting system to use for your business. While the best option is to choose an accounting software application that works for your business, you can also use spreadsheet software, such as Microsoft Excel.
3. Choose cash or accrual accounting
When setting up your accounting system, you will also need to choose cash accounting or accrual accounting. Most small businesses, sole proprietors, and the self-employed use cash accounting because it is so simple. When you use cash accounting, you only record transactions when they occur.
4. Connect to financial institutions
Small business cost tracking can be simplified by linking your financial institutions to your accounting software. While some may be uncomfortable with this option, it is actually very secure, with built-in protections to protect your data.
5. Start managing receipts right
Another way to ensure that you properly track your business expenses is to use the mobile app available with your accounting software application. If your software does not offer such an application, you can choose to use a cost management application that integrates with your software.
6. Consider using a costing app
While not everyone needs it, if you travel a lot for business it may be worth investigating some of the cost applications on the market. These apps are designed to keep track of travel expenses, such as mileage, flight expenses, meals and entertainment expenses, and any other related business expenses.
Before you go, I hope this above article tracking business expenses for taxes will be beneficial and informational for you.
Related to Tracking Business Expenses for Taxes:
- 1099 Expense Tracker App
- How to Save Money on 1099 Taxes for 2021
- What is Tax Deductions for 1099 Contractor?
- Tax Deductions for Lawn Care Business
- Is a Computer Tax Deductible For Small Business?